Risk Assets Persist

Stronger-than-expected payrolls and unemployment near 4.3% pointed to a still-tight labor market, while firm consumption was supported by wealth effects from stronger equity markets and continued fiscal impulse. Inflation remained a key focus, with core CPI rising from its February lows and strong PPI data raising concerns around eventual pass-through into PCE.

Rates markets reflected this more resilient growth and sticky inflation backdrop. The U.S. 10-year yield rose 6 basis points (bps) to 4.44%, while Japan also saw yields move higher. By contrast, several other developed markets rallied, with UK, Canada, Australia, and New Zealand yields declining. U.S. 10-year breakevens fell 9bps, suggesting some moderation in market-implied inflation expectations even as inflation risks remained central to the macro discussion. The U.S. dollar strengthened modestly, with ICE U.S. Dollar Index up 0.9%.

Credit markets remained resilient despite tight valuations. U.S. investment grade (IG) spreads tightened 6 bps to 72 bps, while Euro IG tightened 3 bps to 79 bps. Carry remained the dominant driver of returns, supported by exceptionally strong technicals and continued demand for all-in yield. Both U.S. and European markets absorbed record issuance with little disruption, as strong inflows and healthy investor demand offset elevated supply. In Europe, May marked the largest issuance month on record, while U.S. issuance also exceeded expectations, with the vast majority of new deals tightening in secondary trading. A notable theme was the continued acceleration of AI-related financing, particularly among large technology and hyperscale issuers, reinforcing expectations that infrastructure spending will remain an important driver of corporate issuance. High yield also performed well, with U.S. High Yield (HY) tightening 11 bps to 257 bps and Euro HY tightening 18 bps to 263 bps. Despite the constructive backdrop, valuations remain tight and dispersion persists across sectors, reinforcing the importance of security selection.

Leveraged loans delivered solid performance, supported by strong earnings and healthy CLO demand. Software loans stabilized after earlier weakness tied to AI disruption concerns, though the sector continued to lag year-to-date. Investors remained focused on higher-quality, mission-critical issuers, while housing, lower-income consumer, and packaging exposures showed more strain.

Securitized markets were supported by strong demand and improving technicals. Agency Mortgage-Backed Securities (MBS) spreads tightened as rate volatility eased, while bank and GSE demand helped offset Fed balance sheet runoff. Securitized credit issuance remained robust across Residential MBS (RMBS), Asset-Backed Securities (ABS), and Commercial MBS (CMBS), with residential credit continuing to stand out on stable collateral performance and strong investor demand.

Emerging markets (EM) were mixed but broadly constructive. EM external spreads tightened 11 bps to 215 bps, with support from select Latin American markets and improving political developments in Colombia. Asia faced more inflation and currency pressure, including Indonesia’s rate hike and export restrictions. Oil-linked risk premia remained relevant given still-low vessel traffic through the Strait of Hormuz.

Municipals continued to perform strongly, supported by substantial inflows and favorable technicals despite record issuance. High yield munis remained one of the stronger areas of U.S. fixed income, helped by limited supply and strong demand.

Overall, May reinforced the resilience of risk markets despite sticky inflation, tighter policy expectations, and ongoing geopolitical uncertainty. Technical demand remained a powerful support, but tight valuations and rising dispersion continued to place a premium on sector allocation and security selection.

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^{Risk Considerations
Diversification neither assures a profit nor guarantees against loss in a declining market.}

^{There is no assurance that a portfolio will achieve its investment objective. Portfolios are subject to market risk, which is the possibility that the market values of securities owned by the portfolio will decline and that the value of portfolio shares may therefore be less than what you paid for them. Market values can change daily due to economic and other events (e.g., natural disasters, health crises, terrorism, conflicts, and social unrest) that affect markets, countries, companies, or governments. It is difficult to predict the timing, duration, and potential adverse effects (e.g., portfolio liquidity) of events. Accordingly, you can lose money investing in a portfolio. Fixed-income securities are subject to the ability of an issuer to make timely principal and interest payments (credit risk), changes in interest rates (interest rate risk), the creditworthiness of the issuer and general market liquidity (market risk). In a rising interest-rate environment, bond prices may fall and may result in periods of volatility and increased portfolio redemptions. In a declining interest-rate environment, the portfolio may generate less income. Longer-term securities may be more sensitive to interest rate changes. Certain U.S. government securities purchased by the strategy, such as those issued by Fannie Mae and Freddie Mac, are not backed by the full faith and credit of the U.S. It is possible that these issuers will not have the funds to meet their payment obligations in the future. Public bank loans are subject to liquidity risk and the credit risks of lower-rated securities. High-yield securities (junk bonds) are lower-rated securities that may have a higher degree of credit and liquidity risk. Sovereign debt securities are subject to default risk. Mortgage- and asset-backed securities are sensitive to early prepayment risk and a higher risk of default and may be hard to value and difficult to sell (liquidity risk). They are also subject to credit, market, and interest rate risks. The currency market is highly volatile. Prices in these markets are influenced by, among other things, changing supply and demand for a particular currency; trade; fiscal, money and domestic or foreign exchange control programs and policies; and changes in domestic and foreign interest rates. Investments in foreign markets entail special risks such as currency, political, economic and market risks. The risks of investing in emerging market countries are greater than the risks generally associated with foreign investments. Derivative instruments may disproportionately increase losses and have a significant impact on performance. They also may be subject to counterparty, liquidity, valuation, and correlation and market risks. Restricted and illiquid securities may be more difficult to sell and value than publicly traded securities (liquidity risk). Due to the possibility that prepayments will alter the cash flows on collateralized mortgage obligations (CMOs), it is not possible to determine in advance their final maturity date or average life. In addition, if the collateral securing the CMOs or any third-party guarantees are insufficient to make payments, the portfolio could sustain a loss.}